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Russia Enacts Russian CFC Bill

by Lorys Charalambous, Tax-News.com, Cyprus

27 November 2014


On November 18, 2014, the Lower House of Russia's Parliament, the State Duma, approved at second and third readings Bill No. 630365-6, which would introduce a new controlled foreign corporation (CFC) regime in the country.

The new CFC regime contained in the Bill has an anti-offshore orientation and would give effect to measures proposed by President Vladimir Putin in 2013, to prevent the use of offshore structures to mitigate tax liability in Russia. If approved by the Upper House and the President as is expected, the new measures will come into effect from January 1, 2015.

Under the new regime, foreign companies managed and controlled from Russia will pay the same profits tax as Russian companies where certain conditions are met. According to the Government, the new CFC legislation will prevent companies from using low-tax jurisdictions to obtain unjustified tax benefits, and allow for the taxation of the undistributed profits of CFCs.

The key aspects of the new CFC regime are as follows:

  • A "controlled foreign company" is a foreign company (including corporate entities or structures without legal identity established under the laws of a foreign country) that is managed and controlled by a Russian tax resident; and
  • A "controlling person" of a foreign entity is any natural or legal person whose participation in the foreign entity exceeds 25 percent, or whose participation exceeds ten percent (for individuals, together with a spouse and minor children), and the share of participation of all residents exceeds 50 percent. The participation threshold will be reduced to 25 percent from 2016, as opposed to a transition period until 2017 suggested during the first reading of the Bill.

A foreign company is not subject to the CFC legislation if it is situated in a country with which Russia has signed a double tax treaty, providing that country also exchanges tax information on request, and provided also that the country has an effective corporate tax rate of at least 75 percent of the weighted average Russian tax rate (which newly factors in dividend tax rates, and no longer is as a percentage of Russia's 20 percent corporate income tax rate). Foreign companies whose passive income accounts for less than 20 percent of their profits will also be exempt, as will foreign companies undertaking crude oil activities outside Russia on certain conditions.

The new regime sets out specific notification requirements concerning companies deemed to be CFCs, with reporting to begin from as soon as early 2015. A new penalty regime has also been put in place.

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